3 Top Ranked Sector ETFs for Earnings Season - ETF News And Commentary

Though uncertainty over the Fed’s policy as well as the partial government shutdown are keeping the markets volatile, U.S. equites are still near their all-time highs. This is primarily thanks to upbeat labor data, recovering hosing fundamentals and improved retail data that led to increasing consumer confidence.  

Given this bullish trend, the third quarter earnings season does not seem too bad with earnings for S&P 500 companies expected to be up 1.4% from the year-ago quarter, according to the Zacks Estimate. Further, revenues for these companies are also expected to increase 2.1% from the same quarter last year.

Meanwhile, some sectors are poised for solid earnings and revenue growth as the Q3 earnings season has already kick-started with impressive results from some of the bellweathers such as Adobe Systems (ADBE), FedEx (FDX) and Oracle (ORCL) in late September (read: Top Ranked ETFs for Q3 Earnings). 

As such, investors should consider some sector ETFs that are expected to report positive earnings growth in the coming weeks. Below, we have highlighted three ETFs that could emerge as winners this earnings season and are expected to outperform the overall market: 

Construction

The homebuilding and construction sector would likely be the major contributor to both earnings and revenue growth this earnings season. It is expected to report 22.2% earnings growth and 11.1% revenue growth on year-over-year basis for the third quarter.

This is because the housing market is showing continued improvement on the back of higher home prices and better home sales data. Though rising mortgage rates had put a recovery on hold, the latest decision by the Fed to continue its bond buying program has fueled bullishness into the sector (read: Rocky Road Ahead for Homebuilder ETFs?).

Investors could tap this growing opportunity in the sector with the 

iShares Dow Jones US Home Construction Index Fund (

ITB

)

. This fund follows the Dow Jones US Select Home Builders Index and holds a small basket of 33 stocks. It is heavily concentrated in its top 10 firms with 63% of the total assets. Additionally, the product puts more focus on home construction, indicating that it is a ‘pure play’ on the space.

The fund is popular and liquid with AUM of just under $2 billion and average daily volume of nearly six million shares. The ETF charges 46 bps in fees and expenses. ITB gained over 7% so far this year and currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘Medium’ risk outlook.

Transportation

The transport sector is expected to one of the best performers of Q3 on a reviving U.S. economy and solid results from FedEx (read: Transport ETFs in Focus on FedEx Earnings Beat). The positive trends in the economy suggest growing demand for movement of goods across many economic sectors.

Investors should note that transport is often considered a barometer of broad economic health as it grows when U.S. economic activity picks up. Further, the sector has a direct correlation with retail and manufacturing numbers. The sector is expected to post 10.7% earnings growth and 5.6% revenue growth.

One way to play this trend is with 

iShares Dow Jones Transportation Average Fund (

IYT

)

. The ETF tracks the Dow Jones Transportation Average Index, giving investors exposure to the small basket of 21 securities.

The product puts heavy focus on its top 10 firms at roughly 67%. Further, from a sector perspective, the fund is tilted toward railroads at 30% while delivery service sector makes up for nearly 20% share.

The fund has accumulated $644 million in AUM while sees good volume of trading. It charges 46 bps in fees and expense. IYT delivered robust return of 26.42% in the year-to-date time frame and has a Zacks ETF Rank of 1 or ‘Strong Buy’ with a ‘Medium’ risk outlook.

Financials

Financials in Q3 have been benefited the most from the growing speculation over the Fed tapering and the resultant interest rate rise. However, with the Fed now keeping its $85 billion in monthly QE intact, the financial sector has seen some downside creating a nice opportunity for investors (read: Financial ETFs Tumble on Citigroup Warning).

In fact, the finance sector earnings are expected to increase 7.4% on an annual basis on revenue growth of 7.7% in the third quarter. This is because the sector is benefiting from growing demand for some types of trading and its potential for increasing dividends and buybacks. Notably, financials have accounted for the largest increase in dividends in the last three years.

Investors could find the ultra-popular 

Financial Select Sector SPDR Fund (

XLF

)

 an exciting pick to benefit from the current trends. The fund tracks the S&P Financial Select Sector Index and has amassed over $15 billion in its asset base. Volume is massive, trading in more than 46 million shares a day. The ETF charges just 0.18% in expenses (see: all the Financial ETFs here).

The product holds 83 securities in its basket, with moderate concentration (around 50%) in the top 10 holdings. The ETF is quite spread across sectors with diversified financial service taking 32.2% share, followed by insurance and commercial banks with at least 17% share each. XLF is up over 24% YTD. The product currently has a Zacks ETF Rank of 1 or ‘Strong Buy’ rating with ‘Low’ risk outlook.

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